What are RBI’s qualitative and quantitative instruments of credit control?

First Published: May 6, 2010 | Last Updated:May 6, 2010

The government through the reserve bank of India employs the monetary policy as an instrument of achieving the objectives of general economic policy. The main objectives of the monetary policy are as follows:

Regulation of monetary growth and maintenance of price stability

Ensuring adequate expansion of credit

Assist economic growth

Encourage flow of credit into priority and neglected sectors

Strengthening of the banking system of the country

The quantitative or general measures influence the total volume of the credit while the qualitative measures influence the selective or particular use of credit.Reserve Bank of India has the power to influence the volume of credit created by banks in India. The banking regulation act 1949 says that the Reserve Bank of India can ask any particular bank (or even all the banks i.e. banking system of the country) to not to lend to particular groups/ persons.Apart from this RBI is armed with weapons to control the money market in India. For example each bank has to get a license from RBI to do banking business in India and this license is always subject to cancellation by RBI provided the bank does not fulfill the requirements stipulated by RBI. Each scheduled bank needs to send a weekly report to RBI which shows its assets and liabilities.The quantitative measures of credit control are :

Bank Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts the approved bills held by commercial banks. For controlling the credit, inflation and money supply, RBI will increase the Bank Rate. Current Bank Rate is 6%.

Open Market Operations: OMO The Open market Operations refer to direct sales and purchase of securities and bills in the open market by Reserve bank of India. The aim is to control volume of credit.

Cash Reserve Ratio: Cash reserve ratio refers to that portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves. The current Cash reserve Ratio is 6%.

Statutory Liquidity Ratio: It refers to that portion of deposits with the banks which it has to keep with itself as liquid assets(Gold, approved govt. securities etc.) . the current SLR is 25%.If RBI wishes to control credit and discourage credit it would increase CRR & SLR.

Qualitative measures:Qualitative credit is used by the RBI for selective purposes. Some of them are

Margin requirements: This refers to difference between the securities offered and and amount borrowed by the banks.

Consumer Credit Regulation: This refers to issuing rules regarding down payments and maximum maturities of installment credit for purchase of goods.

Direct Action: This step is taken by the RBI against banks that don’t fulfill conditions and requirements. RBI may refuse to rediscount their papers or may give excess credits or charge a penal rate of interest over and above the Bank rate, for credit demanded beyong a limit.